One Guy’s Thoughts on Housing Prices

I realized just now that there is only about one year left in my wife’s training program, after which she will be geographically mobile again and we plan on moving back close to family. This also means that we have only one year left before we plan on buying a house. Scary! I haven’t been keeping a particularly close eye on the real estate market, just kind of reading the newspaper and talking with friends.

What will housing prices be like in a year? Who knows for sure, but here are my thoughts on housing prices, from a late-20s guy who’s never owned a house. I think that housing prices are set by supply and demand like everything else, and people buy what they can afford. I think that four major things have made the prices rise to fast in recent memory: low interest rates, dual-income families, relaxed mortgage lending policies, and parental support.Low Interest Rates
This one’s pretty obvious. With lower rates, you can afford more house with the same monthly payment. According to Bankrate, the average rate for a 30-year fixed mortgage is now 6.38%. Tomorrow the Fed is supposed to raise rates another 0.25%. I’m a bit concerned as I thought that the rate hikes would slow down by now, as having to lock in an 8% mortgage doesn’t sounds like fun. Of course, as mortgage rates go up, that should also put pressure on housing prices. Shrug.

Dual-Income Families
Everyone’s qualifying for these mortgages based on both incomes, also allowing them to qualify for a bigger amount. When we have kids, we don’t want to both have to work full-time and buy daycare. It would be nice to be able to technically qualify based on only one income. Perhaps that’s just dreaming, as this seems to be the status quo now.

Relaxed Mortgage Lending Policies
When’s the last time you heard someone actually pay 20% down for a house? I’ve heard of only one, and that was because of parental support. These days you can put down 0-10%, and then convince the mortgage company that you’ll put 50% or more of your income towards a housing payment. Wa-lah! You’ve just qualified for a $300,000 home with a $60,000 combined income. Just about anyone can get some sort of loan. And if not…

Parental Support
Every single person my age but one who’s bought a house that I know has gotten parental support for downpayment assistance. I guess it’s partially tradition as well. We might get some support too, as our siblings have gotten it already. But this is also answering all those “How did they afford it?” questions. Man, it’s tough on your own.

Short-term, all these things helped prop up real estate prices. Long-term, interest rates will even out, and I don’t think banks can become any more lax than they already are. Perhaps a flurry of foreclosure will give them a reality check. I think parental support will be around forever, and may even increase over time.

In the end, like everyone else, I just hope we’ll be able to afford a house that we can start a family in while living in the place we love.

This is my one and half cents:
I think anyone who wants to build a financial future should own a real estate property (anything from a house to a condo to a duplex…) before they do anything else such as stock and mutual funds. The return of real estate in about 5-7% each year for the last 30 years and that is more stable than any other means of investment. The earlier you can get into the housing market the better. For those who are keen on great deals and market opportunities, they can always find good way to further enhance their property value by remodeling with controlled budget. Your return of investment would be even higher on that.

I agree with those and would add that society is becoming stratified again – the middle class is shrinking and dividing into the haves and have nots — and the haves are competing for homes in the desirable areas (mostly cities and in California). Secondly, families are competing to get into good school districts which creates false scarcity in real estate.

Fiancee and I are putting down 20% or more without any parental support. Though my retired parents are more than happy to pay for my house in cash, we choose to pay for our own expense since I already owe them enough throughout my life and my giantic college tuition…

Interests showed in Bankrate are not accurate at all (I just finished mortgage shopping this month). The average up-to-date 30-year fixed rate (not even APR) is from 6.5-7.0… It’s going up faster than a rocket in these couple weeks… AND, we’ll see if the fed will raise more than 25bp TOMORROW(if not in August)…

Price will definitely adjust next year but the problem is that interest rate is going faster than the house price drop…

Talking about the risk ranking for the housing prices in the cities:link

Jon, it seems that you missed an interesting article in yesterday’s USA Today on the housing market. There are some other factor affecting the housing prices. Good luck with your real estate investment!

Dual income families have been a factor for at least 30 years. I can remember in the mid 70s thinking about buying a house and it being out of reach then, as I as a single person at the time, could not compete with all the dual income families.

I am in agreement with the others. I would just like to make a couple suggestions.

1. Don’t count on any money from your parents. Do all calculations without it and then it will be all that much sweeter when it comes.

2. Prepare yourself a budget and determine how much you have left after all expense (except rent), savings, and charity. This is how much you can afford I’m hoping monthly. Now subtract 1/12 of what you expect insurance and taxes to be and if you choose some amount you feel comfortable with for repairs (I like $50 per month). Then take the left over amount and put in your financial calculator or in an Excel Spread Sheet – enter the interest rate and time of loan and calculate in reverse what you principle amount should be.

3. Add to the above amount any money you have saved for a down payment leaving enough out to cover closing costs.

One last idea – If you are unable to put 20% down and your mortgage would require PMI talk to the bank about setting up 2 mortgages. One big mortgage for the 80% and one shorter term mortgage for the 20% less your down payment. This will help you avoid PMI and paydown your principle faster.

Foreclosures are everywhere – terrible for our world, possible discount for you. I estimate things to get worse around September and stay there sadly for a while. This will hold down your house price.

I believe the latest loan application has 2 questions – do you have a job, and do you have a pulse? Those seem to be the only requirements for getting a loan. It amazes me that when you go to get a loan, they are only interested in cc min payment, and rent payment, and car loan. They figure those are your only expenses for the month. HA! As mentioned in an earlier post, somehow people on 60K income qualify for 300K house. So they buy the house, get a heloc, barely getting by on it all based on their 2 incomes. That is how it has been going for a few years now. Then, 1 spouse looses their job, heloc rates go up, so they get a new appraisal… OH, now we have another 20K equity (125% value), lets borrow that! Now they are way over their head, rates keep going up – can’t find a job, so they foreclose. The point of all this is, what is going to happen to whoever (banks, investors, etc) who are financing these loans and not able to get their money back?

(having said all that it is easy to blame the banks for loaning the money, but people need to wake up and realize Americans better start saving their money!)

One thing that most people “forget” about when they talk about buying a house are all the ancillary things that go along with it – window blinds, lawn mower, furniture, paint, etc. They’re all one time costs, but they add up.
People save so much for their down-payment, they don’t have any “padding” for these items.

And I think you’ll also discover that, even if you buy new, you’ll have a list of home-improvement projects that is as long as your arm. You’re almost never done. We ended up adding a $50/month item on our budget to cover the cost of going to Lowe’s/Home Depot!

One factor to consider is that people who got into ARMs over the last few years will have those re-adjust starting soon, at which point many will not be able to afford their mortgage, flooding the market with foreclosures.

I’m struck by the negative vibe of the responses. Maybe we are on the cusp of a decline, but that has been the call for it seems like three years now and I’ve captured 200K of increased equity over this period in my first house! By captured I mean I bought nearly an acre on which I’m building a good size house. We are a one-income family with three young kids in California. Yes, we happened to catch one of the greatest bull markets in real estate history but I maintain if you are willing to provide a few months of intense sweat equity, find a house that looks like it is in bad shape but is essentially sound and you will have a decent chance of moving in with equity on day1. As far as the naysayers, remember the most expensive advice you can get is free! Number two: Don’t expect people to be as happy for you as you are going to be for yourself.

My wife and I will be paying 20% down for our house soon. We have about 60-70% so far, not including emergency fund and extra padding. Also, we will not receive any parental support as we are better off than both sets of parents (although still on the lower end of the middle class). So, there are still people who pony up the 20%… although we can buy a new 2000+ square ft, 4 BR, 3 BA home in a good neighborhood for around $160k. So, I think where you are buying is a key factor.

Also, regarding D’s comment about avoiding PMI… According to Suze Orman (im a big fan) if you do have to pay less than 20% it is actually better to avoid the piggy-back (80/20) loans as well. The best way to do it is to ask to pay the PMI all up front and you get a big discount and you can actually roll that cost into the original mortgage. The cost to pay PMI up front is only like 0.75%. You can read more about it at this link: PMI Magic

Ok, just a few things in response to the original post and some responses… I run a small mortgage company and figured I could provide some input. I’ll try and be unbiased. 🙂 Won’t plug my company name either, if you would like my assistance email me.

1) The rate that was raised yesterday (federal funds rate, currently 5.25%)does not _directly_ affect long-term mortgage interest rates. It DOES however, directly affect your credit card rates and most home equity lines of credit (HELOCs) since they are based on the Prime rate (which is based on the feds fund rate plus a margin, currently 8.25%) plus/minus some margin. Actually, it’s been the norm recently that when the Prime rate goes up, long-term mortgage rates (15years and up) go DOWN at least for a small period of time, usually a month or so. The reason is beyond my ability to explain here, but a typical 30-year fixed rate is based off of the 10-year Tresury Bond rates, which for an odd wall-street-induced reason tend to decline slightly when the fed funds rate is reduced. I’m not saying that longterm rates are not increasing currently, they certainly are, just not due to the Fed’s increases directly. Rises in the 15 and 30-year fixed rates are influenced by inflationary expectations. Rising the Prime rate has certain effects on the market which affects something else then something else and so on, which CAN cause the 10-year bond to climb, but they are in no way proportional or even guaranteed. Last year longterms rates actually decreased for a few months as the Prime rate climbed. Weird stuff. One thing is certain though, they climbed more than they decreased! 🙂

2)The average PAR rate that can be given to a customer today is right around what Bankrate says 6.38-6.6, thereabouts, but really, no lender has that available to the customer without charging origination fees, otherwise they wouldn’t make money. So the real-world average is more like high 6’s to very low 7s, taking into account that it’s padded a bit by the lender to make a bit more without charging points up front. A good mortgage broker should disclose this info to you so that you can see how much you are being charged both upfront by way of fees and points and also by way of margin (called yield spread) padded onto the rate you got, lenders (big banks) are not required to disclose their margins on the rate, and guess what, they never do.

2) Dual-incomes and family-gifts are always going to be around, honestly, they have very little bearing on market prices. A single woman does not buy the same size house, in the same neighborhood as a dual-income family. Location, size and quality drive base market values, then you add the demand of the public to give you what you see today. Dual-income families are not typically out there looking at 1 bedroom condos… single guy with his first real job is not looking at 2500 sq footer… etc.

3) Many counties have caps on property tax increases for primary dwellings…(i.e. 3% a year max property value increase) for example… someone’s been in their current home for 4 years, if they were to sell that home today… the new buyer’s taxes would be at the current market value of the home, whereas the previous owner was being taxed at something like 60% of the current value because of the hike cap. What does this mean? Buying the biggest house you can afford might hurt with regards to payments now, but at least you’re locking your taxes down at today’s rate, and not being shocked by them 5-7 years from now when you buy that upgrade home. I’d rather take a more agressive mortgage (3yr fixed, 5yr with IO) today, on a bigger home, locking in my taxes… and then face whatever the new interest rate is in the future when I refinance or it begins to float… nobody knows where rates are going, but taxes ALWAYS go up, I will pay less with even a 3-4% higher mortgage than what the county is going to hit me with for the taxes on a new purchase. And let’s not forget that in the interim I’ve been living in a much nicer house. Can’t really put a price on that.So if you plan on buying small to get into something bigger later when you need it, be prepared for MUCH higher taxes typically. Of course, this only makes sense if you can _truly_ afford the payments now and also, if you are really set on being a good number of years in the area. Also, some states are pushing (or already do) to allow moves within the same county to keep the previous tax rate, if that’s your case then my argument isn’t as appealing except for the living-in-a-nicer-house-from-the-start thing.

4) For a 100% purchase in a market where house values are appreciating it might make more sense to take the PMI and not do the 2 loans. Why? in an 80/20 (the 2 loan scenario) you will have a great rate on your first mortgage but will pay 3-5% more on the second, which even though it’s much smaller the difference is usually close or more than what you’d pay for PMI. And here’s the worst part… you pay this difference for as long as you have that second mortgage… most of them are for 30 years and balloon at 15… unless you refinance both your great first and the second into one new mortgage when your house appreciates enough to have them both in one MI-less loan. But you might not get as nice a rate anymore! So what happens if you get 100% with MI? You pay the MI as long as what you owe is over 80% of the house’s value, so as the house appreciates, let’s say it takes 5 years for your LTV to be under 80%… all you have to do is prove the new value of your home to the bank by way of an appraisal ($2-350) and it can get removed, leaving you with the great rate and no MI after a few years and not having to refinance potentially losing that great rate and incurring thousands in settlement costs.

OK, enough, basically, what it boils down to is that you can make a mistake in buying or financing your home even in the best of markets, and you can do well even in the worst. Unfortunately, a lot of it depends on what your lender/realtor etc advises you to do. I know I’ve written a lot above, and some might not agree… even I don’t since every scenario is different, but please, when you decide to buy, get some advice from a VERY GOOD mortgage professional… that can tailor a solution for YOUR needs. I’ve seen customers with 30-year fixed mortgages at 5.0% where it was a horrible mistake… because it’s not what was best for THEM. I really hope in a sense that there is a bursting of the bubble so that many quick-buck companies can go do some MLM or something and leave only trusted companies behind. Again, this is not a plug for me, I only work in Florida, wherever you are, don’t pick a broker/lender based just on referrals, do some reading and pick their brain with some questions and see how they respond… wrong mortgage choices usually cost borrowers tens of thousands! Borrow wisely!

I would expect that bank lending policies will become much more stringent if housing prices actually start to decline. And if that happens, there will be less money out there chasing the finite supply of houses and prices will drop even more. Although I live in Socal, I’ve been shipping the Portland, Oregon market and seen a number of $10k price drops on for sale houses in the last few weeks.

In your situation, I can understand how you might see “Parental support” as a factor, but at a macro level, it’s a non-issue in the run-up of housing prices.

And it may be a small factor, but “relaxed mortgage lending policies” pale in comparison to these other factors you missed:
1) New Financing Solutions
Creative new financing solutions such as 80/15/5 -or- 80/10/10 loans as well as interest-only financing by mainstream mortgage lenders have allowed individuals to buy more house than they would have been able to afford previously.

2) Real Estate Investing
With a relatively flat stock market over the last several years as well as Factor #1 above, more and more individuals have moved some of their “nest egg” into residential real estate, driving demand for houses which has also driven up prices.

I think that ‘New Financing Solutions’ falls under ‘Relaxed Mortgage Lending Policies’ as well. It’s all an effort to get people qualified for a loan amount they wouldn’t have qualified for in the past.

I would agree on your #2. Also, a lot of amateurs are getting into real estate flipping.

I bought my first house in October of last year. My situation is different, I am 34 single with no kids (and none anytime soon). Here are a few things I would suggest:

1) Start trying to understand mortgages and lending now. For something that is done thousands of times each day across the country, it is absurd how complicated the process is (I’m sure the lenders like that since at the end of the day it is impossible to know if you got screwed).

2) Define what you need. Going into the process, I had a rough estimate of what I wanted to spend and the features I was looking for. FWIW, I could have gotten approved for double what I was willing to pay. With that in mind, it is easy to keep increasing your target. You look at one house and it’s nice but the next house also has an extra bedroom and is only $5k more and the house after that have a fenced-in backyard and is only $3k more and then you find one with something else that is only $4k more. Next thing you know, you are looking at 10’s of thousands more than you started off at.

3) Buy what you need. I have a friend who bought a HUGE house (4200 sqft) because it was real nice and on a sqft basis was a very good price. There is no reason for him to have a house that large. Now he is having trouble selling it. I know he would like to live in his dream house (which he is currently building) as we all would but for me the dream house comes after the kids (if that happens) are out of college and retirement is in sight. If I was married and planning on a kid sometime 3 years down the road and then waiting to have another 4 years after that, I would buy a house that I could comfortably raise one child and plan on moving once the other one is in the oven.

4) I don’t know where you are planning to move in order to be close to family but an extra hour or hour and a half away could be a major difference in cost of living for you. People often get fixated on a certain place and that becomes the only place they think they can live. It happens to both people in large cities and small towns. I don’t like the larger city I live close to but I know how my pay ranks with what I could get elsewhere and how far it goes here.

Also, if you are like me you will know the right house when you see it. I was frustrated with searching and then I saw my house and thought “Why am I not buying this house”. It even had my non-deal breaker qualities (all brick, all electric, etc.) at the price I wanted in an area which I think will grow tremendously over the next 5-10 years.

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